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Initial Reactions to the Government’s Loss in Loving

Posted on Feb. 11, 2014

The DC Circuit affirmed the district court holding in Loving v IRS, an issue we have written about before (see for example, Oral Argument Today in Loving, from last year). In this post, I write a brief summary of the opinion and offer preliminary advice for the government as it seeks to ensure that taxpayers retain preparers who are subjected to the type of oversight that the IRS contemplated when it sought to impose competency and education requirements for unlicensed preparers.

First, I will briefly summarize the opinion and its rationale.  The DC Circuit found that the government lost at Chevron Step 1. Looking at 31 USC 330(a)(1), in its view the IRS unambiguously did not have authority to regulate tax-return preparers under the statutory provision authorizing it to “regulate the practice of representatives of persons before the Department of the Treasury.”  It also noted that even if the government prevailed at Step 1, the government would have lost at Step 2, in light of the statute’s text, history, structure and context.  As to how it got there, the opinion pointed to “at least six considerations” that “foreclose the IRS’s interpretation.”

It led off with perhaps the strongest argument against the government, keying in on the term “representatives.”  The opinion noted how preparers “are not agents” and that while preparers assist taxpayers they do not represent taxpayers in the normal sense of that word.

Looking next to the meaning of “practice before the Department of the Treasury” the DC Circuit distinguished the filing process from the audit process, and how at audit a taxpayer at that later time may designate a representative to act on her behalf, which in its view “underscores that tax-return preparers do not practice before the IRS when they simply assist in the preparation of someone else’s tax return.” (emphasis in original).

The Circuit Court looked beyond 31 USC 330(a)(1) and analyzed 31 USC 330(a)(2)(D). It referred to how the District Court “succinctly and cogently explained” that “[f]iling a tax return would never, in normal usage, be described as presenting a case.” The opinion also looked to the history of the statute, and, in a manner similar to the District Court, to the broader statutory framework in the Internal Revenue Code that specifically prescribes conduct and penalties for preparers:

“Yet accepting the IRS’s view of Section 330(a)(1) would effectively gut Congress’s carefully articulated existing system for regulating tax-return preparers…[I delete the court’s recitation of Congress’ amendments to Code provisions that applied to preparers]

Under the IRS’s view here, however, all of Congress’s statutory amendments would have been unnecessary. The IRS, by virtue of its heretofore undiscovered carte blanche grant of authority from Section 330, would already have had free rein to impose an array of penalties on any tax-return preparer who “is incompetent,” “is disreputable,” “violates regulations prescribed under” Section 330, or “with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented.” 31 U.S.C. § 330(b). And that would have already covered all (or virtually all) of the conduct that Congress later spent so much time specifically targeting in individual statutes regulating tax-return preparers.”

A fifth reason the court gave was one that Professor Steve Johnson emphasized in his draft article for the Villanova Law Review Loving and Legitimacy: IRS Regulation of Tax Return Preparation, written before this opinion and presented at a symposium last fall. Namely, the court looked to the non-tax case of Brown & Williamson case (involving FDA efforts to regulate tobacco as a food or drug) that stands for the general proposition that courts should not “lightly presume congressional intent to implicitly delegate decisions of major economic or political significance to agencies…Here, as in Brown & Williamson, we are confident that the enacting Congress did not intend to grow such a large elephant in such a small mousehole. In short, the Brown & Williamson principle strengthens the conclusion that Section 330 does not encompass tax-return preparers.” (at slip op, p. 15).

The final reason the opinion pointed to was the IRS’s “past approach to the statute” which in its view suggested that the agency itself had “never interpreted the statute to give it authority to regulate tax-return preparers.” Here, the opinion pointed to statements in 2005 testimony to Congress by the former head of Criminal Investigations and the National Taxpayer Advocate, as well as the 2009 version of IRS Publication 947.

Going Forward

The government may seek to get Supreme Court review of the matter, or may work with Congress to get specific legislative authority. I offer no views on the odds of the government seeking cert, but its sound beating in two opinions leaves the possibility of obtaining cert and a victory in the Supreme Court seemingly small.

As to legislation, the Baucus discussion draft on tax administrative proposals I wrote about last year here proposes a legislative fix allowing the IRS to regulate unlicensed tax return preparers. I am far from a Washington insider, but I do know from where I sit, the IRS is not held in high regard by many in Congress these days, and I question whether there would be support for such a proposal. There is, however, widespread dislike for refundable credit overclaims. If IRS or the administration can make the convincing policy case for regulation as being part of the tool kit for controlling those errors then perhaps the aversion to the IRS will be less than the dislike of the perception of undeserving poor people getting benefits they do not deserve.

Assuming no Supreme Court or legislative rescue, what is IRS to do? Well, I am working on a broader paper that lays out a stronger case for positive incentives that IRS (and possibly Congress) can give to nudge people to go to preparers that voluntarily opt in to a system premised on competency testing and continuing education. The adoption of sweeteners for taxpayers who visit certified preparers can take many forms, including the possible presumptive protection against certain penalties if a position is disallowed, the potential for expedited refunds, and even more radical provisions that could dovetail with incentives to employers who provide access to qualified return preparation services to their employees.

Despite what happens, and my displeasure with the outcome, congratulations are in order for Dan Alban and Institute for Justice, which brought the case on behalf of its clients and by all accounts handled the case with great skill.

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